Publication Number: FHWA-HRT-2006-005

Bridging the Financial Gap With PPPs

by Michael Saunders

The private sector is taking on new roles as States seek to meet more public needs with fewer dollars.

This aerial photograph shows the South Bay Expressway's Otay River Bridge under construction in southern California. The bridge is part of the S.R. 125 Toll Road, developed as a PPP and connecting San Diego, CA, with Otay Mesa, a major United States-Mexico border crossing and commercial port of entry. Photo: www.southbayexpressway.com.

The role of the private sector in public transportation dates to the beginning of road construction in the United States. Many of the earliest major roadways were private toll roads. Now, after a long time in the shadows of publicly financed and built projects, private sector involvement in highway construction and financing is making a comeback through public-private partnerships (PPPs). Many transportation officials think PPPs will be increasingly important in the future since traditional funding sources are not keeping pace with infrastructure investment needs and continuously growing public demand for travel.

In its December 2004 Report to Congress on Public-Private Partnerships, the U.S. Department of transportation (USDOT) broadly defines a PPP as "a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional." the agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system.

Traditional transportation projects financed from fuel taxes and other highway user fees normally include a major role for the public sector and little involvement by the private sector. On the other end of the spectrum, the private sector may build, own, and operate a transportation facility, often a very complicated and technical project, through a PPP with minimal public involvement. PPPs cover the gamut between those extremes.

"Highways are traditionally government planned, government funded, and government maintained-not the typical American approach to industry," Mary E. Peters, former administrator of the Federal Highway Administration (FHWA), told a conference of the National Council for Public-Private Partnerships (NCPPP) in 2004. "In a time of funding shortages at all levels of government, it is particularly important that we allow-unleash-the private sector to participate in all elements of infrastructure improvements."

Risk Matrix for Public-Priveat Partnerships*

Type of Risk

Source of Risk

Risk Taker

Site Risks

Site conditions

Ground conditions, supporting structures

Construction contractor

Site preparation

Site redemption, tenure, pollution/discharge, obtaining of permits, community liaison

Government delays in granting or renewing approvals, providing contracted outputs

Government

Shortfalls in service quality

Operator fault

Operator

Project company fault

Project company/investors

FHWA Administrator J. Richard Capka noted renewed interest in PPPs a year later, when speaking at a conference of the American Road & transportation Builders Association (ARTBA). "your conference coordinator tells me that 5 years ago there were [fewer than] 100 people at this annual conference -this year, nearly 00," Capka said. Attendees at the conference included government officials, transportation planners, designers, builders, system operators, and the financial experts who back them.

As State highway funding becomes more constrained, and as the need for highly efficient surface transportation systems continues to grow, many transportation professionals believe the role of the private sector will increase. transportation officials across the Nation are seeking ways to capture the efficiency and value that the private sector can provide. And as USDOT officials said in their comprehensive 2004 survey of the PPP landscape, Report to Congress on Public-Private Partnerships, USDOT "is committed to providing a greater role for the private sector in transportation services and infrastructure investment to supplement Federal, State, and local spending for capital investment in our Nation's infrastructure. Coupling private capital and private initiatives with public transportation efforts produces more and better facilities for the traveling public."

Recent History of PPPs

In the late 1980s, some States began exploring the potential for the private sector to augment highway construction programs. Under FHWA's Special Experimental Project No. 14 (SEP-14), created in 1990, States began to evaluate contracting options, including cost-plus-time bidding, lane rentals, and warranties for specific project features. States also studied design-build contracting, especially for the more complex projects under construction today, to realize the efficiencies of having the same contractors both design and construct these facilities and to shift some of the risks of construction delays to the private sector contractor.

In 1991, the Intermodal Surface transportation Efficiency Act (ISTEA) established a new vision for surface transportation in the United States. ISTEA permitted the use of tolls to a much greater degree on Federal-aid facilities. For the first time, private entities were allowed to operate toll facilities, and States were allowed to loan the Federal share of a project's cost to another public agency or private entity constructing the project. This trend in giving States greater flexibility in utilizing innovative financing and operating methods continued with subsequent surface transportation acts, including the Safe, Accountable, Flexible, Efficient transportation Equity Act: A Legacy for Users (SAFETEA-LU).

The St. George Island Bridge, shown here under construction in 2003, was the largest design-build effort undertaken by the Florida Department of Transportation (FDOT) at the time of the bid in 1999. Cost savings through PPPs can be achieved by the use of design-build contracts.

Benefits of PPPs

In January 2006, FHWA Administrator Capka explained to an audience at the annual meeting of the transportation Research Board that the PPP message is taking hold. "We're showing State and local governments how PPPs can turn their highway infrastructure from liabilities into assets."

PPPs confer benefits by allocating project responsibilities to the party- public, private, or a combination of the two-best positioned to produce the desired results. This objective is accomplished by specifying the roles, risks, responsibilities, and rewards contractually to provide incentives for maximum performance and the flexibility necessary to achieve goals.

The primary benefits of using PPPs to deliver transportation projects include expedited completion compared to conventional project delivery methods, project cost savings, improved quality and system performance from the use of innovative materials and management techniques, substitution of private resources and personnel for constrained public resources, and access to new sources of private capital.

According to Jim March, leader of the Industry and Economic Analysis team in FHWA's Office of Policy and governmental Affairs, PPPs can include both innovative contracting and innovative financing. The former has limited private investment but significant private sector involvement in design, construction, and operation, while the latter involves the private sector bringing money to the table, accepting some financial risk, and taking some level of responsibility for the success or failure of the project.

"The definition of PPPs in the report to Congress was intentionally broad to reflect the wide variety of partnership opportunities," says March. "PPPs are more than about private investment. Even cost-plustime bidding and design-build contracting place greater responsibilities, risks, and rewards on the private sector, although perhaps not after construction is completed. PPPs represent a way of stimulating private sector creativity and efficiency that traditional contracting does not, even though they do not necessarily involve private sector operations after the project has been completed."

PPPs can result in significant project cost savings to State and local governments, because accountability for keeping the project on time and on budget is built into the contract as incentives. Current FHWA data indicate that many projects built using PPPs save taxpayer dollars.

Cost savings through PPPs are achieved through any number of innovations in contracting and program management:

Savings through design-build contracts generally are attributed to a closer working relationship between designer and contractor, the design-build team.

Use of warranties entails that the contractor is more likely to deliver a high-quality product in order to reduce future maintenance and repair costs.

Cost-plus-time, also known as A+B bidding, not only considers the initial construction cost in the bidding process but also the time needed for project completion- shifting the risk of project delays from the public sector to the private contractor.

PPPs allow for allocating project risk to the party best able to manage it-resulting in lower overall risk and allowing a PPP to save costs and accelerate delivery of a project.

FHWA encourages PPPs to maximize the use of innovative technologies that will lead to increases in quality and the development of faster and less expensive ways to design and build highway facilities.

Types of PPPs

PPPs generally fall into one of five categories based on the reasons for their creation:

Partnerships designed to accelerate the implementation of high priority projects by packaging and procuring services in new ways

Partnerships that turn to the private sector to provide specialized management capacity for large and complex programs

Partnerships focused on arrangements to facilitate the delivery of new technology developed by private entities

Partnerships drawing on private sector expertise in accessing and organizing the widest range of financial resources

GAO and PPPs

A recent U.S. Government Accountability Office (GAO) report, Highways and Transit: Private Sector Sponsorship of and Investment in Major Projects Has Been Limited (GAO-04-419), found that major transportation projects involving private investment or sponsorship were built sooner than they would have been had the private sector not become actively involved. For example, GAO studied five private sector toll road projects and one monorail project, each of which had been in their respective federally approved State transportation plans for periods of 7 to 30 years.

State, local, and Federal officials described these projects to GAO as needed and worthy, but said the State and local governments were either unable or unwilling to undertake them because of resource constraints. Although the GAO report concluded that "under current conditions and circumstances, private sector sponsorship and investment seems best able to finance a relatively small number of projects," private sector sponsorship and investment were critical to advancing the projects highlighted in the report. Without support from the private sector, some might never have been built, the officials said.

SCDOT incorporated the Southern Connector toll road, shown here, into the interstate system in South Carolina as I-185. The tolls collected go toward satisfying the bonds that financed the road and pay for all road maintenance, including snow removal and grass cutting.

The cases studied include the Dulles Greenway, a four-lane, 22.5-kilometer (14-mile) private toll road extending from the Dulles Toll Road (which is a separate roadway operated and maintained by the Virginia Department of Transportation) to Leesburg, VA. In 1993, the Toll Road Investors Partnership II (TRIP II) was formed to build the greenway. Under the franchise agreement, TRIP II owns the franchise for the route and developed it as a private, for-profit venture. The partnership is responsible for all costs associated with operating and maintaining the road. In 2005, Macquarie Infrastructure Group acquired TRIP II and control of the Dulles Greenway.

In South Carolina, the Southern Connector had been in the State's transportation plans since 1968. Thirty years later, after a proposal in the General Assembly to increase the motor fuel tax failed to pass, the State authorized a private consortium to build the roadway.

The Connector 2000 Association financed the project costs of $217.7 million through the sale of tax-free toll revenue bonds, which will be repaid by toll revenue over a 35-year term. The association is a local nonprofit set up to finance and operate the facility and is the first public-private transportation project in the United States to be financed using a special-purpose corporation.

Although traffic on the Southern Connector has been less than originally projected, revenues have steadily increased since opening to traffic in 2001, according to Robert Thomas, assistant division administrator with the FHWA South Carolina Division. "The PPP allowed the project to be completed and a new interstate facility made available for use by the public much earlier than would have been possible following traditional methods," Thomas says.

This electronic toll collection booth is on the Dulles Greenway, a privately maintained and operated toll road in northern Virginia. The Dulles Greenway is an extension of the Dulles Toll Road, which is maintained and operated by VDOT, leading out to Leesburg, VA.

Examples of PPPs

Private contract fee services. An increasing number of public agencies are expanding the role of the private sector by transferring responsibility for services they would typically perform in-house. This transfer normally is done by awarding competitively procured contracts to the bidder that provides the best value, reflecting both price and technical qualifications.

The District of Columbia Department of Transportation entered into a 5-year contract with a private company to perform maintenance on roadway assets on the National Highway System in Washington, DC, such as this intersection downtown.

Expanding the private sector role enables public agencies to tap technical, management, and financial planning expertise in new ways. This capability can reduce work burdens for agency staff and provide access to innovative technology applications and specialized expertise.

The DC Streets program marked the first urban application in the United States of outsourcing National Highway System (NHS) infrastructure asset preservation to the private sector, in this case from the District (of Columbia) Department of transportation (DDOT) to a private company, using FHWA Federalaid funding. The maintenance and preservation contract-$69.6 million over 5 years-was performancebased and required the company to apply rigorous asset management practices. The contract included the preservation and maintenance of all transportation infrastructure assets on the NHS in Washington, DC, with the exception of traffic signals. Specifically, the following maintenance categories were included: pavement structures, roadway and roadside cleaning, drainage, traffic safety (guiderail, barriers, attenuators, pavement markings, signs, lighting), roadside vegetation, bridges, tunnels, pedestrian bridges, weigh-in-motion stations, and snow and ice control.

"The contractor was tasked with preserving and maintaining the assets at or above a specified condition," says Mesfin Lakew, chief of the asset management division at DDOT. "this arrangement promotes efficiency, optimization of resources, and innovation, and it transfers the risk from DDOT to the contractor. The contractor freely selects the methods, materials, and techniques that will best meet the performance standards developed for the project. However, materials must meet DDOT's standard specifications, unless an exception is approved. This ensures that the resulting work is of acceptable quality and longevity."

Design-build. Design-build is a project delivery method that combines two, usually separate services into a single contract. The designbuilder assumes responsibility for the majority of the design work and all construction activities, together with the risks associated with providing these services for a fixed fee. When using design-build delivery, owners usually retain responsibility for financing, operating, and maintaining the project. Although design-build procurement has been more prevalent in private sector work, it is also gaining acceptance among many public sector transportation infrastructure owners.

Developed through the designbuild method, E 470 is a 6- kilometer (47-mile) toll road running along the eastern perimeter of the Denver, CO, metropolitan area. The facility provides both electronic and manual toll collection facilities at five mainline toll plazas and 2 ramp plazas. The E 470 Public Highway Authority-comprising five municipalities and three counties-has $1.2 billion in bond debt that is scheduled to be paid off in approximately 2076. There is also a requirement for establishing a perpetual maintenance fund, and in 20 6 the Colorado Department of transportation has an option to take over the road.

"Without design-build, E 470 wouldn't be the success it is today," says Matt McDole, chief engineer with E 470. "the upfront guaranteed price and schedule, and experienced private partners, were essential to sell the bonds to move ahead and complete the road."

Build-operate-transfer. The buildoperate-transfer (BOt)/design-buildoperate-maintain (DBOM) model is an integrated partnership that combines the design and construction responsibilities of design-build procurements with operations and maintenance. These integrated PPPs transfer design, construction, and operation of a single facility or group of assets to a private sector partner.

A single design-build-operate contract is established for the entire project, with financing secured by the public agency. The contractor provides long-term operation and/or maintenance services, with the public sector sponsor retaining the operating revenue risk and any surplus operating revenue. The advantage of the BOt/DBOM approach is that it combines responsibility for usually disparate functions under a single entity. This combining of responsibilities enables the private partners to take advantage of a number of efficiencies. For instance, the project design can be tailored to the construction equipment and materials to be used.

The E 470 Public Highway Authority used design-build contracting to develop E 470 (shown here in this aerial photograph), which is a 76-kilometer (47-mile) toll highway that runs along the eastern perimeter of the Denver metropolitan area.

In 1999 the Commonwealth of Massachusetts approved special legislation to develop the Route project on a PPP basis. The legislation enabled the creation of a special purpose, nonprofit corporation that would use lease payments pledged by the Massachusetts Highway Department (MassHighway) to issue bonds. Following the award of the Route procurement to a private contractor, the legislature established the Route North transportation Improvements Association.

The contractor was responsible for arranging the placement of the bond and retained the services of financial advisers on behalf of the Route association, which issued $ 94.5 million in tax-exempt lease revenue bonds to finance the project on the Commonwealth's behalf. The bonds are secured by a 0-year lease between MassHighway and the association. The Commonwealth also made interest payments during the 4-year construction period. MassHighway's rent payments are made through an annual appropriation and covers only debt service; MassHighway decided not to exercise the operation and maintenance option.

Design-build-finance-operate. With the design-build-finance-operate (DBFO) approach, responsibilities for designing, building, financing, and operating are bundled together and transferred to private sector partners. There is a great deal of variety in DBFO arrangements, especially in the degree to which financial responsibilities are actually transferred to the private sector. A common factor that cuts across all DBFO projects is that they are either partly or wholly financed by debt-leveraging revenue streams dedicated to the project. Direct user fees (tolls) are the most common revenue source. However, others ranging from lease payments to vehicle registration fees also are used.

One example of a DBFO project is the S.R. 125 toll Road, commonly known as the South Bay Expressway, which connects the only commercial port of entry in San Diego, CA, to the regional freeway network, completing the missing link in the city's third north-south freeway corridor. The southern 15. -kilometer (9.5-mile) section of S.R. 125 is to be constructed as a privately financed and operated toll road with electronic toll collection. A limited partnership, San Diego Expressway, LP, holds a franchise with the State under which it finances and builds the highway, then transfers ownership to the State. The limited partnership then leases back, operates, and maintains the facility for 5 years. Afterward, control reverts to the State at no cost.

The northern 2.4 kilometers (1.5 miles), including the interchange with S.R. 54, is publicly financed with a mix of FHWA funds and local sales taxes. Once opened, this segment will operate as a freeway. Through two design-build contracts and a limited partnership, the same contractor will build both the privately and publicly funded portions.

Build-own-operate. With the build-own-operate model, a private company is granted the right to develop, finance, design, build, own, operate, and maintain a transportation project. The private sector partner owns the project outright and retains the operating revenue risk and all surplus operating revenue in perpetuity. This approach has been used to develop transportation infrastructure on a limited basis.

Above: The E-470 toll road near Denver uses electronic toll collection, as shown here, to make travel faster and easier for motorists.
Below: MassHighway is constructing the Route 3 North Transportation Improvement Project through a PPP. Route 3 North is shown here near completion, widened to three lanes in both directions. Photo: John Greeley, Modern Continental Construction.

In Alabama, a 21. -kilometer (1 .5-mile) limited access fourlane route from the city of Foley to Orange Beach, gulf Shores, and Perdido Key was built for $44 million by the Baldwin County Bridge Company. The project was financed through a $ 6 million overall private bond issue, with additional grants from FHWA and the city of Foley.

The 9.7-kilometer (6.0-mile) privately financed section includes a 610-meter (2,000-foot) privately owned bridge over the Intracoastal Waterway. The 12.1- kilometer (7.5-mile) public section connects the private road and bridge to State Highway 59. A $2 toll is charged on the bridge.

Federal PPP Initiatives

Report to Congress. Responding to growing congressional interest in PPPs, USDOT published a comprehensive assessment in 2004. The Report to Congress on Public Private Partnerships answers questions posed by Congress and serves as a resource for States interested in using PPPs as a procurement method. The report is divided into five sections: history and initiatives, value of PPPs, impediments to their formation, stakeholder comments, and recommendations for removing those impediments. The value section is designed to help States considering PPPs to better understand the benefits and the downsides. The report, however, is not intended as a manual on how to use PPPs as part of a State program, nor does it address the myriad issues concerning when PPPs should be used and how they should be negotiated.

SEP-15. In 2004, FHWA boosted PPP efforts by establishing Special Experimental Project 15 (SEP-15). The initiative is the next logical step after SEP-14, begun in 1990 to facilitate greater private sector investment in transportation projects through innovative contracting. SEP-15 also builds on "test and evaluation" initiative tE-045, begun in 1994 to allow transportation agencies to experiment with a variety of financing techniques. SEP-14 advanced some 00 projects and helped to make "a number of contracting practices previously considered experimental to become a regular part of the highway program, such as design-build, cost-plus-time bidding, lane rental, and the use of warranties," FHWA said in an October 6, 2004, Federal Register announcement of SEP-15.

For the South Bay Expressway in California, these workers are preparing a column rebar cage prior to placement in a footing on the Otay River Bridge. The southern portion of the expressway is being constructed as a privately financed and operated toll road. The northern portion is publicly financed with a mix of Federal funds and local sales taxes. It will be operated as a freeway.

On that same day, former FHWA Administrator Mary E. Peters explained at a conference, "SEP-15 will encourage formation of PPPs by providing additional flexibility for States interested in experimenting with better ways to develop projects. SEP-15 will lead to increased project management flexibility, more innovation, improved efficiency, timely project implementation, and new revenue streams."

In the Federal Register announcement, FHWA wrote: "A key element of SEP-15 will be to identify impediments in current laws, regulations, and practices to the greater use of public-private partnerships and private investment in transportation improvements and to develop procedures and approaches that address these impediments."

One SEP-15 focus area is financing innovations specifically associated with PPPs. FHWA anticipates that the transportation Infrastructure Finance and Innovation Act (TIFIA) program will continue to be a key element in the finance plan for many PPPs but also wants to encourage other types of innovative financing.

As with SEP-14, upon completion of major milestones, the public private sponsor will be responsible for submitting an independently prepared report summarizing lessons learned from the SEP-15 process, including recommended statutory and regulatory changes that would improve delivery of the Federal-Aid Highway Program.

Model Legislation. Many States have laws and regulations that directly or indirectly inhibit PPPs. Strictures range from requirements for low-bid awards on construction contracts to prohibitions against design-build or outsourcing certain agency functions. There are also prohibitions against tolling or commingling public and private funds.

On the other hand, as of February 2004, 2 States had passed legislation providing the legal authority for private sector participation in transportation projects to varying degrees. Even in States where PPP arrangements are not specifically prohibited in regulations, laws, or State constitutions, experience indicates that specific State legislation can minimize the risks of litigation and delay.

The Otay River Bridge, shown here, is part of the South Bay Expressway, which will be operated by a limited partnership, San Diego Expressway, LP. Both the private and publicly funded portions of the roadway are being built by the same contractor under two designbuild contracts. In this photo, precast segments are erected over the third cantilever.

FHWA has offered help in this regard through a project to develop model legislation and illustrative contract language to help States enable PPPs. For example, FHWA has a series of 28 issues, posed as questions, with corresponding legislative language in response. "Who has rate-setting authority to impose user fees and under what circumstances may they be changed or otherwise reviewed?" is one question. The answer begins: "Each agreement may authorize the contracting party to impose tolls or user fees for use of the transportation system constructed and/or leased by it to allow a reasonable rate of return on investment." to view all the questions and answers, visit www.fhwa.dot.gov/ppp/legislation.htm.

This effort began in 1991, when FHWA convened a policy workshop on PPPs. The purpose was to focus attention on the broad range of issues and tradeoffs that may be associated with changes in public and private roles in the provision of transportation facilities and services. Subsequent dialogue explored an array of opportunities and challenges, ranging from "how-to" issues, such as the public sector's role in overseeing subcontracts, to broad visions of the private sector building and operating most projects and the public sector taking a subordinate role. FHWA decided to share the perspectives even further, publishing in 1992 a report, Exploring Key Issues in Public- Private Partnerships for Highway Development: Summary of Seminar Proceedings (FHWA-PL-92-023).

More recently, in 200 -2005, FHWA sponsored a series of "Partnerships in transportation" workshops in California, Florida, Minnesota, Missouri, North Carolina, Oregon/Washington, and texas. Participants included State and local elected officials, State and local transportation officials, and private sector representatives who had been involved in PPPs.

In 2005, FHWA summarized the workshop discussions in Partnerships in Transportation Workshops: Final Report. The report outlines the lessons learned from the workshops, with emphasis on the elements of a successful PPP project from both public and private perspectives, impediments to PPPs in surface transportation programs, and strategies for overcoming those impediments. The report also summarizes the status of PPP programs in each State that hosted a PPP workshop.

In parallel efforts, FHWA cosponsored, with ARTBA, the annual Public-Private Ventures in transportation Conference, which includes presentations on PPPs. FHWA also sponsors a comprehensive transportation Finance Conference with the transportation Research Board.

Web Site. Finally, as a resource for those interested in PPPs, FHWA operates a "Public-Private Partnerships" Web site at www.fhwa.dot.gov/ppp/. The site includes definitions of PPPs, options, case studies, resources, and more. Each section is further broken down into answers to common questions. The PPP site responds to "the growing interest in capitalizing on new forms of partnerships between the public and private sectors to plan, finance, build, and operate the Nation's transportation infrastructure," FHWA writes.

A recent addition to the Web site, the Manual for Using Public-Private Partnerships on Highway Projects provides a one-stop resource for States on how Federal regulations apply to PPPs and effective ways to meet these requirements.

State PPP Initiatives

At the State level, the list of DOts with experience exploring and implementing PPPs continues to grow. In texas, for example, the texas Department of transportation (TXDOT) recently entered into a PPP with a private consortium that will help fund the trans-texas Corridor, a proposed multiuse, statewide network of transportation routes that will incorporate existing and new highways, railways, and utility rights-of-way. The consortium agreed to invest $6.0 billion in a toll road between Dallas and San Antonio and give the State $1.2 billion for additional transportation improvements between Oklahoma and Mexico. In return, the firm plans to negotiate a 50-year contract to maintain and operate the toll road. (For more information, see the article "transtexas Corridor" in the July/August 2005 issue of Public Roads or visit www.keeptexasmoving.com.)

In Virginia, the Public-Private transportation Act of 1995 allows private entities to enter into agreements with the Virginia Department of transportation (VDOT) to construct, improve, maintain, and operate transportation facilities. According to VDOT's Web site (www.virginiadot.org/business/ppta-default.asp), two projects have been completed to date under the act, five projects are listed as under construction, and six more are in the proposal stage.

SAFETEA-LU Provisions Affecting PPPs

On August 10, 2005, President Bush signed the SAFEtEA-LU legislation, which authorized the Federal surface transportation programs for highways, highway safety, and transit for the 5-year period of 2005-2009. FHWA Administrator Capka, speaking at the Southeastern Association of State Highway and transportation Officials' annual meeting in August 2005, cited the law's "increased flexibility" for a number of programs "designed to attract private sector investment and participation."

Opened in the summer of 2000, the six-lane Foley Beach Express provides an alternate route to the heavily congested State Highway 59 into the resort city of Orange Beach, AL. Consisting of 23 kilometers (14 miles) of four-lane highway and a bridge spanning the Intracoastal Waterway, the Foley Beach Express was built through a PPP between Baldwin County Bridge Company, LLC, the city of Foley, and Baldwin County, AL.

Private activity bonds. SAFETEALU's provisions expand authority for private activity bonds by adding highway facilities and surface freight transfer facilities to a list of other activities eligible for up to $15 billion in tax-exempt bonds. Qualified projects, which must already be receiving Federal assistance, include surface transportation projects receiving funds under title 23 of the U.S. Code, international bridge or tunnel projects for which an international entity authorized under Federal or State law is responsible, and facilities for the transfer of freight from truck to rail or rail to truck. These bonds are not subject to the general annual volume cap for private activity bonds for State agencies and other issuers, but are subject to a separate national cap of $15 billion.

Tolling provisions. Other SAFETEA-LU provisions give States more flexibility and opportunities to use tolling to reduce debts or finance operating, construction, or reconstruction projects. Recognizing that the tolling and pricing opportunities made possible by the law may be confusing, FHWA established a tolling and Pricing team to assist public authorities by directing them to the most appropriate program (or programs) among the available options. In addition, FHWA created a "tolling and Pricing Opportunities" Web site, which offers, among other things, a description of all the programs, points of contact, a means to submit questions electronically, and instructions on how to submit an expression of interest via the Internet. The site is accessible at http://ops.fhwa.dot.gov/tolling_pricing/index.htm.

TIFIA. Also included in SAFETEALU is language amending TIFIA, which provides Federal credit assistance to nationally or regionally significant surface transportation projects, including highway, transit, and rail. The program was established in the 1998 transportation Equity Act for the 21st Century to fill market gaps and attract substantial private coinvestment by providing projects with supplemental or subordinate debt.

PPPs Overseas

Of all highly developed nations, the United States is among those in the earliest stages of PPP implementation. Internationally, particularly in Europe, PPPs have proven their value time and again. According to the International Project Finance Association, the United Kingdom currently implements the most PPPs, but other countries such as Australia, Germany, New Zealand, Norway, and South Africa also have taken the lead in implementing these programs.

Concessions, for example, are a common form of PPP used overseas. Concession agreements typically allow the concessionaire to design, build, and operate a project, with the right to receive revenues from operations and/or to receive payments from the public agency for use of the project. As stated in FHWA's 2001 report Contract Administration: Technology and Practice in Europe, although only a minimal number of private transportation concessions have been awarded in the United States, several European countries are leveraging concessions for major portions of their highway systems. In France, concessions have been an integral part of its program to develop, operate, and maintain its main highways for more than 30 years. Portugal is aggressively employing concessions as part of its strategic plan to develop its national highway system and plans to have 90 percent of the system administered by concessions.

The main reasons for using a concession range from a lack of public funding to a belief that private financing and delivery provide higher quality. Concessions also are being used as a means to provide benchmarks for measuring the performance of public sector agencies. Further, many European highway agencies are beginning to take on the role of network operator rather than provider of services, which leads to outsourcing production tasks through concession contracts.

The United Kingdom has used PPPs to build or improve an array of infrastructure, including roads, museums, office buildings, and prisons. PPPs first became popular in Great Britain in the early 1990s. British infrastructure, most notably highways, had become plagued with delays as local governments were burdened with the cost of maintenance and renewal. The prohibitive costs of reconstruction meant that improvements often were critically delayed, resulting in massive declines in infrastructure quality. When construction finally began, limited public funds often meant that completion was delayed and, as a result, costs increased.

In the past decade, the use of PPPs in the United Kingdom proved to be a remarkable remedy. A survey by Her Majesty's Treasury showed that out of 61 PPP projects, nearly 90 percent were completed early or on time. Projects that were not completed on time were completed within 3 months of the scheduled date.

In the May 2005 report Construction Management Practices in Canada and Europe, published following a 2004 scan tour, FHWA noted some important differences between the project delivery philosophy of Britain's Highways Agency that of State departments of transportation in the United States. Although the Highways Agency had used the traditional design-bid-build method until the early 1990s, more recently the agency has begun delivering the majority of its services through third parties, in particular through contractors and consultants.

The FHWA scan team members were particularly interested in the Highways Agency's project delivery method involving early contractor involvement (ECI). The premise of the ECI delivery method is that traditional methods create the team too late in the project development. Even in design-build delivery, the Highways Agency estimates that the design is at least 80 percent constrained, leaving little scope for innovation and consideration of constructibility, including health and safety planning. In the ECI delivery system, design and construction professionals are selected early in the project development process through a qualifications-based selection process. The contractors then develop a target pricing system in conjunction with the Highways Agency.

In the ECI target pricing contract, the Highways Agency tenders the project with only feasibility plans and selects a contractor through a purely qualifications-based procurement process to complete the delivery team. When the contractor is hired, the project has an approved budget price. Through additional planning and design, the delivery team establishes a work estimate that becomes the contract target price. The target price is then fixed as the baseline price for the project from that point forward. Various mechanisms throughout the design and construction enable the contractor to share in savings from this target price and participate in losses if an overrun occurs, thereby creating a pain/gain relationship. This policy is designed to motivate the contractor to assist with the most economical delivery option for the advance works not included in the contract target price.

For more information about these and other international activities involving PPPs, see the following resources: the FHWA PPP Web site at www.fhwa.dot.gov/ppp/resources.htm, the USDOT Report to Congress on Public-Private Partnerships at www.fhwa.dot.gov/reports/pppdec2004/, the FHWA report Contract Administration: Technology and Practice in Europe at http://international.fhwa.dot.gov/contractadmin/contractadmin.pdf, or the FHWA report Construction Management Practices in Canada and Europe (FHWA-PL-05-010).

SAFETEA-LU authorizes a total of $610 million through 2009 to pay the subsidy cost (similar to a commercial bank's loan reserve requirement) of supporting Federal credit under TIFIA. To encourage broader use of TIFIA financing, the threshold required for total project cost is lowered to $50 million in general and $15 million specifically for intelligent transportation system (ItS) projects. Eligibility is expanded to include public freight rail facilities or private facilities providing public benefit for highway users, intermodal freight transfer facilities, access to such freight facilities, and service improvements to such facilities, including capital investment for ItS technologies.

State Infrastructure Banks. SAFETEA-LU also establishes a new State Infrastructure Bank (SIB) program that allows all States, territories, and like jurisdictions to enter into cooperative agreements with USDOT to establish infrastructure revolving funds eligible to be capitalized with Federal transportation funds. This program gives States the ability to increase the efficiency of their transportation investment and expand their infrastructure capacity.

Design-build. Finally, Section 150 of SAFETEA-LU stipulates that the current design-build regulations be revised to permit transportation agencies to issue requests for proposals, proceed with awards of design-build contracts, and issue notices to proceed with preliminary design work prior to completion of the National Environmental Policy Act process. The $50 million floor on the size of contracts that can use design-build contracting without special approval also will be eliminated.

Once completed in about 50 years, using a mix of public and private ventures, including PPPs, the Trans-Texas Corridor will be one of the State's largest transportation assets. Here, traffic backs up on a portion of the corridor-Interstate 35-heading into downtown Austin.

Moving Forward

New and innovative ways of contracting and financing much needed transportation improvements are necessary to help meet the everincreasing demands on the Nation's surface transportation system. FHWA is committed to working with the transportation community, both public and private, to expand PPP opportunities to help meet U.S. transportation investment needs.

Michael Saunders is the FHWA program manager for PPPs. He has worked for more than 25 years in transportation, including with FHWA in the areas of transportation planning and project development, as deputy commissioner of the Connecticut Department of transportation and as the Federal Railroad Administration's manager of the Northeast Corridor program office overseeing improvements between New York City and Boston, MA.